Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

3 Responses to “Broad Market Lagged Price to Earnings Ratio”

Or said differently, the valuation (multiple) assigned by market participants reacts slower than earnings, remaining hopeful a bit longer when earnings are declining, and refusing to believe the numbers (or at least refusing to react to them) when earnings are rising. For a while, at least.

That statement makes the assumption that the market’s (people’s) expectations are that rates of change will nominally remain unchanged, with no assumption of acceleration or deceleration in the markets.

Which does kinda make some sorta sense, as people generally do a poor job of estimating acceleration/deceleration. The multiple (as a measure of what people are willing to pay for earnings) should lag a little, with people being initially unwilling to pay for increased earnings, or staying hopeful that earnings declines are temporary aberrations, until they begining to get left behind.

It always amazes me on chart after chart how the 1999-2000 peak is an even more unique outlier than the 1932 low when looking at a century or more of stock marke trendst. It is clear to me that data presentations need to go back 50 years or more(like this graph) to have any hope of real historical context for the big picture. Just including 30 years of data has this huge elephant sitting in the room that makes peaks that would look high by historical standards look below normal instead.

Looking at this chart it seems the P/E ratio currently is reasonable and the longer-term horizon is still likely upward. Having said that however, we personally switched out of stocks indicies and into long dated bond ETFs on April 1st and 2nd; there were just too many short-term negatives despite new stock market highs and I think a short-term dip is imminent.

Say Hello

About Barry Ritholtz

Ritholtz has been observing capital markets with a critical eye for 20 years. With a background in math & sciences and a law school degree, he is not your typical Wall St. persona. He left Law for Finance, working as a trader, researcher and strategist before graduating to asset managementRead More...

Quote of the Day

"Misers aren't fun to live with, but they make wonderful ancestors." -David Brenner

Sign Up For My Newsletter

Get subscriber only insights and news delivered by Barry every two weeks.